Facing mounting criticism, the Narendra Modi government at the Centre has decided to drop its >Budget proposal to tax a portion of the EPF (Employees’ Provident Fund) corpus upon withdrawal. An ill-conceived move both context- and content-wise, it has deservedly been given a burial. “In view of the representations received, the government would like to do a comprehensive review of this proposal, and, therefore, withdraw the proposal in paragraph 138 and 139 of my Budget speech,’’ Finance Minister Arun Jaitley said in a statement in the Lok Sabha. The government has also withdrawn the proposal to limit tax-free contributions by the employer to the provident fund account of an employee to Rs.1.5 lakh a year. This did not gel with the Budget speech rationale for taxing EPF savings — to bring parity in tax treatment between the EPF and the National Pension System (or NPS, where employers can pay up to 10 per cent of salary as contribution without any such cap). By putting the EPF back into an EEE tax regime (where contributions, income as well as the accumulated corpus are all exempt from tax), the government’s volte-face would help retain the EPF’s popularity among the salaried class, most of whom are part of it not out of choice but by statutory default. The Finance Minister had himself called them hostages to the EPF in his last Budget, but instead of setting them free, he thought it better to tax them citing fair taxation principles. It is still not clear whether the government had initially thought it could pull the >taxation proposal past its middle-class constituency. In the event, the tax on EPF withdrawal gave additional ammunition to an aggressive Opposition, including the Congress party. Differences within the National Democratic Alliance and the Cabinet finally ensured the climbdown by the Finance Ministry.
While announcing a return to status quo on the EPF, the Finance Minister has rightly retained the Budget provision allowing NPS subscribers to withdraw 40 per cent of the corpus without any tax liability. The remainder 60 per cent will attract a combination of withdrawal tax and deferred tax on the annuity products one buys. In a way, partial tax relief for the NPS will narrow the existing tax-induced gap between the EPF and the NPS. The strident opposition to EPF tax must be read in the context of the virtual absence of a social security net of any worth in India. There are no two views on the need to move towards a ‘pensioned society’. However, this cannot happen abruptly or in a coercive manner — people need to be nudged over time to gear up for such transitions. Whatever the intention, it was the ‘out-of-the-blue’ approach of the government that triggered an uproar. A sheepish rollback is a smart move, ahead of a round of Assembly elections. It is to be hoped that this U-turn will trigger a larger debate on ushering in a holistic social security ecosystem in the country.